Over the course of this past week, we spent many hours talking to clients and companies about our A&D launch. Feedback was generally constructive and focused largely on our out-of-consensus calls on BA, TDG, and GD, and our risk analysis on the commercial aero orderbook.
-- Aerospace Views:
Our Morgan Stanley Aircraft Retirement Analysis received positive feedback as it is a differentiated approach from what the Street has taken so far. Our thesis of owning the aftermarket instead of new aircraft production was positively received. Investors broadly agreed that global air traffic would continue to rebound.
The market seems to be underestimating the downside risks to the OEM aircraft order book. There is significant optimism that accelerated aircraft retirement could increase demand for new aircraft in the next few years. In our view, oil at $50 per barrel could provide lower retirements than expected.
What would make us positive regarding our outlook on new aircraft production is if we see a pick-up in new aircraft orders. At this time, we are still seeing order cancellations and deferrals and it is still too early to see new aircraft orders. We will continue to track aircraft orders, cancellations, and retirements.
-- Defense Views:
Some investors remain concerned that a Democrat sweep in the upcoming elections could pose downside risks to the Defense Budget. Investors that are bullish Defense are of the view that the Defense Budget would likely be up under a Biden administration.
In a recent interview with Stars and Stripes published on September 10, 2020, Biden "does not foresee major reductions in the U.S. defense budget as the military refocuses its attention to potential threats from "near-peer" powers such as China and Russia." This supports our view that a Democrat controlled government would fit our base case Scenario 1 of Keeping up with the Neighbors.
The attractive valuation of high-quality defense companies is piquing interest for some, but overall interest in Defense will likely pick up in October, closer to the election. This feedback applies to the large-cap Defense Lockheed Martin, Northrop Grumman, L3Harris.
One of the surprising discussions we had on Boeing was whether or not the company is quality or beta. Some view Boeing as quality over airlines. However, we view Boeing as beta due to company specific risks.